Buffett's 2010 Letter To Shareholders

For those who care what the man whose corporate existence is intimately tied to the government’s bailout of the financial system, has to say, below we present Buffett’s 2010 letter to shareholders. 

The only section that is relevant to us, and which continues to demonstrate why Berkshire is a walking moral hazard (contrary to his conedmnation of financial weapons of mass destruction), is the disclosure on derivatives.



Two years ago, in the 2008 Annual Report, I told you that Berkshire was a party to 251 derivatives contracts (other than those used for operations at our subsidiaries, such as MidAmerican, and the few left over at Gen Re). Today, the comparable number is 203, a figure reflecting both a few additions to our portfolio and the unwinding or expiration of some contracts.

Our continuing positions, all of which I am personally responsible for, fall largely into two categories. We view both categories as engaging us in insurance-like activities in which we receive premiums for assuming risks that others wish to shed. Indeed, the thought processes we employ in these derivatives transactions are identical to those we use in our insurance business. You should also understand that we get paid up-front when we enter into the contracts and therefore run no counterparty risk. That’s important.

Our first category of derivatives consists of a number of contracts, written in 2004-2008, that required payments by us if there were bond defaults by companies included in certain high-yield indices. With minor exceptions, we were exposed to these risks for five years, with each contract covering 100 companies. In aggregate, we received premiums of $3.4 billion for these contracts. When I originally told you in our 2007 Annual Report about them, I said that I expected the contracts would deliver us an “underwriting profit,” meaning that our losses would be less than the premiums we received. In addition, I said we would benefit from the use of float. (more…)

Where Most Of Your Time Should Be Spent

Selecting the one or two super trades should consume most of your time. There’s a great deal of work and thinking to be done in comparing markets, finding the best Open Interest play and carefully reviewing the premiums. The average tendency is to rush over this section of trading simply because it seems more productive to look at all the technical wiggle-waggles.

In actuality, as I’ve said so many times, unless you are fundamentally right in your initial selection decisions, all the technical tools will do is get you in trouble. Please devote all your concentration and energies to the selection of your commodities before you give the technical data any consideration at all. Technical data is secondary to screening out the potential big winning trades.

The only technical tool to look at during this screening is the ten week moving average trend line. For a bullish situation it should be slanting up; for a bearish market, it should be slanting down.

by Larry Williams, excerpt from his book, How I Made $1,000,000 Trading Commodities Last Year.

Go to top